Lawmakers begin debating repeal of business tax cut
Topeka ? The largest committee room in the Statehouse was packed Thursday, with many people left standing in the halls, as the House Taxation Committee opened hearings on one of the weightiest issues of the session: whether to repeal one of Gov. Sam Brownback’s signature tax cuts of 2012 that benefits the owners of more than 330,000 farms and businesses.
House Bill 2023 would put a sunset, retroactive to Jan. 1, on what is commonly called the LLC exemption, a law that completely exempts from state taxes income earned from pass-through entities such as limited liability companies, partnerships and sole proprietorships.
The issue has been pushed to the forefront as the state faces a mounting revenue shortfall that analysts say could continue for years into the future unless the Legislature either raises taxes or cuts spending to bring the budget back into structural balance.
But Acting Revenue Secretary Sam Williams urged the panel not to pass the bill, arguing that it has done what it was intended to do — create new jobs and boost the Kansas economy.
“Kansas boasts five consecutive years of record new business formations,” Williams said. “We’ve reversed 20 years of cumulative wealth losses to Missouri. Unemployment has remained under 5 percent for 17 consecutive months.”
But Williams got off to an awkward start when he admitted that the fiscal note his agency had prepared underestimated how much new revenue the state would receive by repealing the tax cut. Williams said the $178.6 million projected in the note for next fiscal year was too low, and he said a revised fiscal note would be submitted soon.
Others have estimated the LLC exemption costs the state upwards of $250 million a year.
Williams specifically pointed to Kansas City, Kan., as an example of one community that has seen rapid job growth since the tax cuts. But Democratic Rep. Kathy Wolfe Moore, who represents that area, said the tax cuts had nothing to do with it.
“There has been gubernatorial assistance in Kansas City, Kan., that has helped us tremendously, but it just wasn’t this governor,” she said.
Committee Chairman Steve Johnson, R-Assaria, said the job growth and low unemployment could be due to any number of factors.
“Our unemployment number by virtually all measures is low, but yet we don’t seem to be finding the revenue,” Johnson said.
Rep. Tom Sawyer, D-Wichita, argued that no matter how many jobs may have been created by new pass-through businesses, the state as a whole has seen net job losses over the past year.
“I think we would all agree we want to be growing more than we have,” Williams responded.
Some of the most stinging criticism of the tax cut came from former Rep. Mark Hutton, a Wichita Republican, who supported the bill in 2012, but who said he has since changed his mind about the business tax exemption, in part because of what he said was a basic unfairness about the law. Hutton did not run for re-election in 2016.
“For me, this has never been about the income,” Hutton said. “It’s been about a balanced tax policy and the fact that we should respect all of our taxpayers equally.”
Lona DuVall, president of the Finney County Economic Development Corporation, drove from Garden City to Topeka to testify in favor of the bill. She said that community has seen significant growth in recent years, but she said none of it has been due to the tax cuts.
“We have never had a prospect, either before or after 2012, who identified state corporate income tax rates as any kind of determining factor in their decision to do business in Kansas or in Finney County,” DuVall said. “Not one prospect has told us that.
Meanwhile, Dave Trabert, president of the conservative think tank Kansas Policy Institute, urged the panel to reject the bill, even though he agreed with those who said the tax break was fundamentally unfair.
“Fairness is a legitimate issue,” he said. “But this legislation only addresses one of at least dozens of fairness issues that are in statute. In fact, one is baked into our Constitution.”
That was a reference to Article 11 of the Kansas Constitution dealing with property taxes, and providing that commercial property is taxed on 30 percent of its market value while residential property is taxed on only 11.5 percent.
But he pointed to other inequities in the tax code, including sales tax exemptions for a long list of items and provisions that allow state employees not to pay taxes on the employer contributions into their pension plans, either when the money is put in or when it’s taken out after retirement.
The purpose of Thursday’s hearing was only to receive public testimony. The committee is expected to work on the bill and possibly vote to send it to the full House at a later date.